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Daily Newsletter, Tuesday, 06/25/2002

HAVING TROUBLE PRINTING?

The Option Investor Newsletter Tuesday 06-25-2002
Copyright 2001, All rights reserved. 1 of 3
Redistribution in any form strictly prohibited.
Posted online for subscribers at http://www.OptionInvestor.com
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MARKET WRAP (view in courier font for table alignment)
************************************************************
06-25-2002 High Low Volume Advance/Decline
DJIA 9126.82 -155.00 9413.08 9111.25 1.46 bln 1304/1693
NASDAQ 1423.99 - 36.40 1475.58 1419.25 1.86 bln 1341/2136
S&P 100 483.42 - 9.62 499.78 482.07 Totals 2645/3829
S&P 500 976.14 - 16.58 1005.88 974.21
RUS 2000 452.45 - 6.64 463.13 451.16
DJ TRANS 2627.92 -111.70 2740.06 2615.41
VIX 31.47 + 1.60 31.64 28.65
VXN 59.88 + 1.23 60.28 58.34
TRIN 1.19
PUT/CALL 0.76
*************************************************************
Hamburger Anyone?
Not steaks, chops, prime rib or roasts. Hamburger, ground into
unrecognizable lumps by the markets. The bounce last week kept
the bulls alive for several days. The bounce yesterday was like
opening the door to the feed lot gate and leaving a trail of
corn right into the slaughterhouse door. Bulls marveled at their
luck and rushed to gobble up the free food right up until the
lights went out. After spending the first three trading hours
trying to break resistance the bulls finally gave up and the
recent pattern repeated itself with a dive into the close.
Chart of NYSE/NASDAQ up/down volume
Chart of the Dow
Chart of the Nasdaq
The day started out well with the Existing Home Sales coming in
at 5.75 million. This was below last months rate but better than
the consensus of 5.60 million. The housing market is still alive
and well and continuing to feed off lower interest rates. Consumer
Confidence came in at 106.4 which was the lowest level in three
months but still above consensus estimates of 105.5. These numbers
should have reassured investors that the economy is still on the
recovery road but the bearish sentiment was just too strong to
overcome.
Bearish signs still abound and you know the old saying, "Things
in motion tend to stay in motion" and that is still true today.
Starting the day was news that UAL had asked the government for
$1.8 billion in loan assistance. This makes them the biggest
carrier to ask for assistance as a result of the 9/11 disaster.
The company has lost more than $2 billion since the attack. US
Airways was sued by FLY, an airplane leasing company, for not
making payments on planes and refusing to return them. S&P cut
its debt rating to "selective default" after the company said it
was attempting to negotiate with creditors and alter contracts.
U said it might have to file bankruptcy if it could not win
concessions from employees and creditors.
Adding to the transport sector woes was a guidance statement
from FDX which was substantially less than current analyst
estimates. There was a heated feud on CNBC after the network
called the guidance a warning. The CEO claimed it was just
guidance and not a warning since they had never issued guidance
about this quarter. CNBC claimed that since it was less than
the consensus, which was clearly known by the company in advance,
that it was a warning that they would not meet estimates.
Whichever term you wish to use it prompted investors to knock
a whopping -$8.02 off the stock to close at $48.11. With these
significant hits to the transportation index, a -111 loss to
2628, the Dow had no chance.
Despite the positive guidance from Dupont and good news from
Boeing the Dow gave back nearly all of the Monday bounce. Dupont
said they would beat analyst's estimates by as much as 20% due
to higher than expected sales. Considering the drought in the
manufacturing and chemical sectors this was a breath of fresh
air. However, DD was only able to hold on to $.13 cents of gains
for the day.
Boeing said orders for planes was running ahead of schedule and
narrow body planes were in demand from lower cost carriers. BA
also managed to hold on to $.13 cents of gains at the close.
Boeing has an ace in the hole and it is expected to announce a
whopping $90 billion in orders from the government for a fleet
of tanker aircraft to replace the aging 707 style currently in
force. The current tanker fleet is more than 35 years old and
those are hard years. The current worry is that fatigue is
setting in and very soon those planes will start falling out
of the sky. Not only would that be an expensive crash but if it
happens while a dozen or so Stealth fighters or F18s are showing
up with empty tanks then it would be even worse. Boeing has
offered to lease the planes, newer 767 models, to the government
in light of the current funding problems. This would be a win/win
deal for Boeing. Still, it only gained 13 cents. Along the same
lines Northrop (NOC) said it was days away from a $17 billion
contract to modernize the coast guard. Over 100 new boats, 35
new planes, etc. Looks like a good time to be in the defense
business.
The clone wars coming to your PC soon. No, not the movie but if
you are AMZN it is still the attack of the clone. Buy.com announced
a plan to sell books for 10% less than the AMZN prices. The price
war began heating up after AMZN announced free shipping on orders
of $49 or more. Buy.com then announced free shipping on all orders
with only a weight limit exclusion. Amazon has cut prices four
times in the last eleven months. Most analysts believe the cheap
books are loss leaders to get AMZN customers to visit the website
and hope they buy more expensive products. AMZN dropped -2.17 or
12.5% on the news.
Another price war is heating up in the PC sector. HPQ announced
a new line of inexpensive printers. They claim to have spent more
than $1 billion and three years to design and produce more than
50 new printing systems. Since the majority of profit is in the
ink cartridges it is imperative to get consumers to use your
products. The printer sale is once only but they sell expensive
ink cartridges for years to come. Lexmark may be the big
loser since a reinvented HPQ could grab serious market share.
LXK dropped -3.33 on the news.
News after the bell was enormous. 3Com beat the street by six
cents and PALM earnings were inline with estimates. Micron
missed estimates and guided lower saying inventory levels were
growing in light of slowing PC sales. This news should send the
SOX even lower on Wednesday. However this was insignificant
compared to the blockbuster below.
In a story broken after the close by CNBC it appears WCOM has
committed massive corporate fraud by intentionally overstating
its income by as much as $3.6 billion over the last five
quarters. The CFO was dismissed, creditors have been notified
and bankruptcy appears imminent. The company accounted for normal
costs as capital expenditures in order to falsify earnings and
stay within their debt requirements. This means the $29 billion
in public debt will likely be defaulted and investors will take
a beating. This Enron type accounting scandal is likely to send
the markets to new lows as investors already fed up with the
markets problems throw in the towel. S&P futures are down -14.50
as I write this. The auditing firm during this period - Arthur
Anderson.
As a setup day for tomorrow's disaster today was no slouch. Down
volume on the Nasdaq beat up volume by 1.548 billion to 283
million. This was a better than 5:1 margin. The NYSE did not
fare much better with a 3:1 ratio. Volume was only moderate
at 1.46 B for the NYSE and 1.86 B for the Nasdaq. Certainly
not capitulation numbers. The WCOM disaster today brings up the
very real possibility that Wednesday could be that capitulation
day everybody has been wanting. With the major indexes closing
just above the Monday lows and except for the Dow, just above
the 9/11 lows, any serious drop tomorrow could trigger all sorts
of selling. Margin calls are already rising and a monster down
day could flush out all those still holding on margin. Foreigners
still long the U.S. markets despite the declining dollar could
decide the corporate accountability does not measure up to the
risk and pull their money for safer investments. The dollar set
new lows today against the Euro and that was before the WCOM
news. The markets are facing a crisis of confidence. Confidence
that earnings will improve. Confidence that those earnings will
be reported truthfully. Confidence that the recovery is really
underway. Confidence that stocks will ever come back from these
lows. Confidence that investors will live long enough to see
these events come to pass.
I have no confidence crisis. I am confident the market will tank
at the open. I am confident that there will be huge moves in the
indexes. I am confident that aggressive investors will make huge
sums from those moves. Our only task is deciding how to get in
front of those moves at the right time and with the right amount
of capital. If you follow the Market Monitor during the day you
know we will be doing our best to make this happen. I am excited!
This could be THE event that that culminates the bottoming
process. If not then S&P 500 may not refer to the index but the
level at which that index trades!
Enter Very Passively, Exit Aggressively!
Jim Brown
Editor
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INDEX TRADER SUMMARY
********************
BLINK OF AN EYE
by Leigh Stevens
TRADING ACTIVITY AND OUTLOOK -
Yes, it seemed that the big rally off yesterday's lows as over
with in the blink of an eye.
AND NOW FOR SOMETHING COMPLETELY DIFFERENT -
Since the market appears to be trading off the dollar - this is
not a "normal" preoccupation for U.S. equities, but the market is
lacking direction so it's taking it from the greenback. We have
seen this in past market cycles with bonds, the money supply,
etc. I would not normally be preoccupied with the direction of
the dollar, but because it raises inflation fears, has
implications for potential European/Japanese participation in
buying U.S. stocks, and has some impact on big U.S. multinational
foreign earnings, its time to take stock of the dollar. The
dollar/euro is a key "benchmark" to use.
Now, I remember the Euro trading against the dollar, where one
Euro fetched well over a dollar. It started trading in January
1999 at 1.1675 and got a bit higher than this before beginning a
long slide against the dollar, eventually hitting a low at .8266
in late October, 2000.
In early-1999 a holder of the Euro currency converted each for
$1.17. At the low point not quite 2 years later you were getting
only 83 cents for 1 Euro. That is a loss of purchasing power,
against the dollar, of nearly 30 percent! Now, I always thought
that the Euro "should" trade around "par" (1 to 1) to the dollar.
Well, stay tuned! - we're almost there per the chart below.
Moreover, the 1.01 level is a 50 percent retracement of that
major 2-year decline - very common in markets to see retracements
of half of a prior decline (or advance).
Dollar/Euro (EUR/USD) Weekly chart: "Continuous Futures" contract
As the chart below above indicates, there is a
technical objective based on the "triangle" formation (a
"consolidation" pattern) outlined, that has 1.0185 (1.02) as the
pattern's "minimum" upside objective. The point is, is that the
fundamentals and technicals of the dollar, relative to our major
trading partners, do not point to an "endless" decline in the
dollar and an "endless" rise in the Euro, Yen, British Pound,
etc.
When economic growth in Europe and Japan - especially Europe,
poised for recovery - kicks in again, the currencies will
stabilize in the long-term. However right now, we're growing
faster than across the "pond" and this increases our imports,
making for a balance of payments problem, which drives the dollar
down. In the short term, there will be a tendency for the Euro to
trade I think +/- 5 percent above and below 1.00. At some point
again, we can forget about the dollar as something to trade "off
from" in indexes.
I think the key to the U.S. Stock market on other than a short-
term day-to-day basis, continues to be this - the market will
stabilize and start a sustained rebound when the fundamentals
relating to stocks begins to turn around, which is when the
earnings trend reverses. In past cycles it was enough to "see"
this potential out a few months - but stocks were cheaper in many
past cycles after a prolonged bear market, because they were not
coming down from MEGA-multiples in terms of P/E's after a (stock
market) "bubble".
In terms of a potential market bottom around these recent lows
and for the key-5 stocks for Nasdaq (I focus on the "weaker"
market, as only when this one bottoms can it stop being a "drag"
on the NYSE/S&P 500 stocks), today's market action did not result
in a lot of change. MSFT still acts like it has or is bottoming
- ditto ORCL; if CSCO can hang in around recent lows, it may put
in an interim bottom - ditto for QCOM; only INTC is really
struggling to put in a bottom - but it is "hanging" in the area
of its recent, as well as September's, lows. The INTC close
today was no doubt on the bearish side as it went to a new
closing low. I think Intel has to at least stabilize here to get
some upside traction on Nasdaq - a rebound would benefit the Dow
Industrials also.
The overall technical picture remains bearish - I think we have
the possibility at least that the market could be bottoming
based on key stocks' chart action. However, if we start getting
new lows for this recent downswing in the 5 Nasdaq stocks
mentioned + GE, my Dow downside target to 8860 comes to the
forefront again. There just may be nothing ahead anytime soon, no
"news", etc. that would "spark" a rally of more than 1-2 days and
that doesn't owe most of its upside rebound to short-covering.
By the way, bearish "sentiment", as I measure it, has only seen a
1-day "extreme" that I might normally associate with a
significant market bottom. And, this was on expiration-Friday and
I tend to discard the significance of that. Since then my CBOE
equities call to put volume indicator has not shown the HIGH
level of put volume relative to calls, that suggests
"capitulation" by the bulls and a conviction that prices were
going to continue to be driven down substantially lower still.
S&P 100 Index ($OEX.X) - Daily/Hourly charts:
If 480 sets up as a double bottom, then the index is a potential
buy, although OEX is not quite at oversold extremes on all time
frames. In terms of getting fully oversold again, OEX will either
have to go sideways or lower. If 480 is exceeded to the
downside, 473 is a possible target at the low end of the
downtrend channel. In that area, as on prior occasions, traders
may want to exit puts and play the call side for a rebound.
Key resistance is in the 495-500 price zone per the cluster of
prior relative lows and the recent high (in red). On balance, OEX
looks like a buy around 470, a sell at 500.
Dow Index (1/100: $DJX.X) - Daily/Hourly charts:
In a switch, recently the Dow has been weaker than the broader
market of NYSE stocks. It seem doubtful that yesterday's low at
90.8 is by some "magic" again going to be where buyers ride to
the rescue. 89 looks like a possible objective.
Resistance is anticipated at the 94 to 94.5-94.7 area. DJX looks
like a sell above 94, a potential buy around 89.
DJX and the both S&P indexes both retraced half of their last
downswing and then reversed. About as expected - in a moderate
to strong rebound, stocks/indexes will tend to recover 50 percent
or half of the prior decline - THEN will resume the dominant
trend (down, here).
A less weak recovery rally will retrace about 38% of a prior
downswing - exactly the retracement levels of the QQQ and Nas
Composite, before they reversed lower again.
Nasdaq 100 Trust Stock (QQQ) Daily/Hourly charts:
QQQ resistance was implied by prior lows at 27.5-26.8, which
turned out to be remarkably accurate with the intraday high at
26.8. 25.2, at yesterday's low could provide "support" again,
but my best guess is that the Q's make a new low, perhaps gain
reaching the low end of its downtrend channel and at the low end
of the hourly and daily trading envelope lines.
QQQ is probably a buy in the 24-24.5 area and a definite sell
back up toward the 27 area again.
NOTE: The "centered" moving average on the hourly charts is
not shown (unlike the daily chart) - it is 21; e.g., on the
hourly chart, the lower band is always 5% below the 21-hour
moving average. THIS week's TRADER'S CORNER (Thursday) article
will be on the "ins and outs" of moving average envelopes.
Leigh Stevens
Chief Market Strategist
lstevens@OptionInvestor.com
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MARKET SENTIMENT
****************
Wondering About WCOM
By Eric Utley
If WCOM did it, who else could have committed such wide sweeping
fraud? After all, one upon a time WCOM was the darling of the
Nasdaq. The question is on the mind of investors tonight. How
will they answer tomorrow morning remains to be seen. But the
post market futures aren't looking so good. Could this be the
event that sparks the capitulation that the Street is looking
for? It could get very interesting tomorrow.
Speaking of interesting, there was one sector finish higher on
my quote sheet Tuesday. It was the Oil Index (OIX.X) with a
whopping 0.02 percent gain. Yes, it was that ugly. The most
unsightly sector of the day was the Hardware Index (GHA.X).
Weakness in storage stocks was brought on by a credit downgrade
on EMC (NYSE:EMC), which sparked fear in the broader technology
segment.
The fear in tech spread to the broader market as signaled by
the rise in the CBOE Market Volatility Index (VIX.X). The
index finished near its recent relative highs Tuesday, and
the same could be said for the Nasdaq 100 Volatility Index
(VXN.X). These are the two indicators to watch closely
tomorrow for signs of capitulation.
Certainly the bullish percent data are pointing towards a
washout. The Nasdaq-100 bullish percent ($BPNDX) reversed
back into bear confirmed at a level of 16 percent. That means
that only 16 stocks in the index are on buy signals, which is
a most oversold reading. But the status of the index in bear
confirmed has me switching any previous belief of a bounce in
technology shares. The Dow Jones Industrial Average bullish
percent ($BPINDU) lost two more stocks during today's
session to finish at 33 percent.
The ARMS Index numbers moved further into extreme oversold
territory during the session. The 5-day ARMS Index closed
at 1.85, well above the 1.50 oversold benchmark reading.
Perhaps more important to the intermediate-term outlook, the
21-day ARMS Index moved into extreme oversold readings for
the first time since last fall.
Interestingly, there were more new highs traced on the NYSE
during the day's session than new lows. But only five more
new highs. Nevertheless, it was the only sign of internal
strength that I could find in all of the indicators that I
monitor. And there are a lot of them.
The bulk of the numbers in this column point to a capitulation
in the coming sessions. Will it happen? Well, I just don't
know. But I've read and heard some very smart trades predict
a washout event this week in the last two days. Yes, the
media is calling for the same, which turns off of the idea,
but the numbers don't lie. The important thing, as a trader,
is to keep to your discipline if a capitulation day does
come. Using strict risk management is a must if you're going
to survive the volatility that comes with a washout. Just
keep your head about you and we will get through this.
-----------------------------------------------------------------
Market Averages
DJIA ($INDU)
52-week High: 11350
52-week Low : 8062
Current : 9127
Moving Averages:
(Simple)
10-dma: 9464
50-dma: 9899
200-dma: 9827
S&P 500 ($SPX)
52-week High: 1316
52-week Low : 945
Current : 976
Moving Averages:
(Simple)
10-dma: 1009
50-dma: 1064
200-dma: 1103
Nasdaq-100 ($NDX)
52-week High: 2071
52-week Low : 1089
Current : 1023
Moving Averages:
(Simple)
10-dma: 1090
50-dma: 1222
200-dma: 1406
Oil ($OIX)
The OIX finished 0.02 percent higher. It was the best performing
sector of the day. Let me repeat that: The OIX finished 0.02
percent higher.
There were five OIX components that finished fractionally higher
Tuesday. They were: Royal Dutch (NYSE:RD), Amerada Hess
(NYSE:AHC), BP (NYSE:BP), Occidental (NYSE:OXY), and Total Fina
(NYSE:TOT).
52-week High: 338
52-week Low : 267
Current : 313
Moving Averages:
(Simple)
10-dma: 313
50-dma: 320
200-dma: 306
Hardware ($GHA)
The GHA was the worst performing sector on the day with its 5.19
percent plunge. Lexmark (NYSE:LXK) was downgraded by Merrill
Lynch. EMC (NYSE:EMC) had its credit rating cut by Standard &
Poor's (S&P).
The leading losers in the GHA were Emulex (NYSE:ELX), who
recently moved to the NYSE, Sanmina (NASDAQ:SANM), Storage
Tech (NYSE:STK), QLogic (NASDAQ:QLGC), and Network Appliance
(NASDAQ:NTAP).
52-week High: 322
52-week Low : 165
Current : 172
Moving Averages:
(Simple)
10-dma: 187
50-dma: 210
200-dma: 232
-----------------------------------------------------------------
Market Volatility
The VIX rebounded from its 10-dma in today's session, finishing
just below recent highs.
The VXN hovered below the 60 level for most of the day. I'm
willing to be it spikes above there tomorrow.
CBOE Market Volatility Index (VIX) - 31.47 +1.60
Nasdaq-100 Volatility Index (VXN) - 59.88 +1.23
-----------------------------------------------------------------
Put/Call Ratio Call Volume Put Volume
Total 0.76 470,203 359,279
Equity Only 0.65 408,953 266,131
OEX 0.76 19,885 15,429
QQQ 1.24 27,358 34,052
-----------------------------------------------------------------
Bullish Percent Data
Current Change Status
NYSE 50 - 1 Bull Correction
NASDAQ-100 16 - 2 Bear Confirmed
DOW 33 - 7 Bear Confirmed
S&P 500 41 - 1 Bear Confirmed
S&P 100 40 - 3 Bear Confirmed
Bullish percent measures the number of stocks in an index
currently trading on a buy signal on their point and figure
chart. Readings above 70 are considered overbought, and readings
below 30 are considered oversold.
Bull Confirmed - Aggressively long
Bull Alert - Cautiously long
Bull Correction - Pause or pullback in upward trend
Bear Alert - Take defensive action if long
Bear Confirmed - High risk if long, good conditions for shorting
Bear Correction - Pause or rebound in downtrend
-----------------------------------------------------------------
5-Day Arms Index 1.85
10-Day Arms Index 1.44
21-Day Arms Index 1.51
55-Day Arms Index 1.38
Extreme readings above 1.5 are bullish, and readings below .85
are bearish. These signals don't occur often and tend be early,
but when the do, they can signal significant market turning
points.
-----------------------------------------------------------------
Market Internals
Advancers Decliners
NYSE 1434 1798
NASDAQ 1329 2109
New Highs New Lows
NYSE 105 100
NASDAQ 74 202
Volume (in millions)
NYSE 1,485
NASDAQ 1,885
-----------------------------------------------------------------
Commitments Of Traders Report: 06/18/02
Weekly COT report discloses positions held by small specs
and commercial traders of index futures contracts at the
Chicago Mercantile Exchange and Chicago Board of Trade. COT data
can be found at www.cftc.gov.
Small specs are the general trading public with commercials being
financial institutions. Commercials are historically on the
correct side of future trend changes while small specs tend
to be wrong.
S&P 500
Get this, S&P commercials grew less bearish by a wide margin last
week. They brought in their net short position by about 18,000
contracts. Not by surprise, small traders grew less bullish by
about 12,000 contracts.
Commercials Long Short Net % Of OI
06/04/02 369,298 440,027 (70,729) (8.6%)
06/11/02 388,751 457,018 (68,267) (8.1%)
06/18/02 437,530 487,956 (50,426) (5.4%)
Most bearish reading of the year: (111,956) - 3/6/01
Most bullish reading of the year: ( 36,481) - 10/16/01
Small Traders Long Short Net % of OI
06/04/02 167,713 58,885 108,828 48.0%
06/11/02 174,357 69,464 104,893 43.0%
06/18/02 181,178 88,517 92,661 34.3%
Most bearish reading of the year: 36,513 - 5/01/01
Most bullish reading of the year: 114,510 - 3/26/02
NASDAQ-100
Nasdaq commercials eased off of their recent bullishness by
adding back a few more shorts. Small traders went in the
opposite direction by adding a few more longs than shorts.
Commercials Long Short Net % of OI
06/04/02 47,875 39,100 8,775 9.3%
06/11/02 45,946 36,878 9,068 10.9%
06/18/02 54,816 49,169 5,647 5.4%
Most bearish reading of the year: (15,521) - 3/13/01
Most bullish reading of the year: 9,068 - 06/11/01
Small Traders Long Short Net % of OI
06/04/02 12,162 21,420 (9,258) 27.2%
06/11/02 14,561 25,330 (10,769) 27.0%
06/18/02 20,883 29,153 (8,270) 16.5%
Most bearish reading of the year: (10,769) - 06/11/01
Most bullish reading of the year: 8,460 - 3/13/01
DOW JONES INDUSTRIAL
Dow commercials bought into the weakness last week to the tune of
more than 3,000 contracts added to their net bullish position.
Small traders made the money. They added to their net short
position by more than 4,000 contracts.
Commercials Long Short Net % of OI
06/04/02 20,564 16,169 4,395 11.0%
06/11/02 20,369 17,172 3,197 8.5%
06/18/02 25,995 19,115 6,880 15.1%
Most bearish reading of the year: (8,322) - 1/16/01
Most bullish reading of the year: 15,135 - 10/16/01
Small Traders Long Short Net % of OI
06/04/02 7,114 9,639 (2,525) (14.7%)
06/11/02 7,500 9,925 (2,425) (13.9%)
06/18/02 5,379 11,813 (6,434) (37.2%)
Most bearish reading of the year: (8,777) - 10/12/01
Most bullish reading of the year: 1,909 - 1/16/01
-----------------------------------------------------------------
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INDEX TRADER GAME PLANS
***********************
THE SECTOR BEAT - 6/25
by Leigh Stevens
The important Chip sector was off again today - seems that
investors see less and less reasons to hang on to the
Semiconductor ($SOX.X) stocks based just on the economic recovery
potential ahead. Consensus seems to be that tech has to get to
lower levels still before the stocks will be "fairly" prices
relative to currently projected earnings. "FOB" is Fiber Optics
- huge over building of broadband capacity is continuing to weigh
on these stocks.
Note that the Healthcare Index ($HMO.X) continues to slip as
investor rush for the exits in order to preserve substantial
unrealized profits in these stocks. The Airline sector continued
lower, consistent with the chart pattern showing that a new down
"leg" was underway as of the break of key support at 75 at mid-
month.
The Defense sector ($DFI.X) continued to retreat in line with my
recent bearish forecasts based on the chart - DFI has now reached
an important recent low - however I see another down "leg" coming
and still ahead. The recent gold stocks ($XAU.X) "recovery" rally
is "falling apart" technically, about as expected. There is
NEVER an economic reason for a prolonged bull market in gold
without prolonged inflation and our economy leans slightly more
toward deflationary tendencies currently.
FEATURED SECTORS include the charts and some updated comments on
Healthcare and the Home Builders.
HIGHER ON THE DAY ON Tuesday -
Lonely little oil index - NO other of the commonly followed
sector indexes were up on the day.
DOWN ON THE DAY on Tuesday -
There were a LOT more besides these sectors that were down on the
day, but these were all down 4 percent or more.
SECTOR TRADE RECOMMENDATIONS & REVIEW -
OPEN/NEW TRADE RECOMMENDATION(S) -
Buy BBH at 79.10
(Biotech HOLDR's Trust stock)
Stop at 76.00
OPEN POSITIONS -
Long IJS at 91.25
Long IJS at 88.50
Average price: 89.87
(S&P 600 small cap value iShares)
Stop: 87.60
Long IWM at 91.00
(Russell 2000 iShares)
Stop: 89.50
TRADE LIQUIDATIONS -
NONE
SECTOR HIGHLIGHT(S) -
Healthcare Index; Morgan Stanley ($HMO.X)
STOCKS: AET; AHG; ATH; CAH; CI; FHCC; HUM; MME; OHP; OPTN;
PHSY; TGH; THC; UNH; WLP
SOME PRIOR COMMENTS: Possible downside reversal is suggested
by the bearish price/RSI divergence. "Confirmation" would be on a
close under 630 at the up trendline. Bearish also was rising
"wedge" pattern. I think the HMO index will work lower, to
between 587 and 564 or between the 38 and 50% retracement points.
TODAY: Downside momentum has accelerated since HMO broke its
trend - close on the low today suggests further weakness will be
seen tomorrow. Again, I never fail to be struck by how a
prolonged rise to higher highs, accompanied by a declining RSI,
so accurately reflect a top that is coming - the actual reversal
can take some time to manifest, but it usually comes eventually,
with a vengeance.
UPDATE: 6/25
Home Construction Index - (Home Builders: $DJUSHB) - Dow Jones
STOCKS: BZH; CLPO; CPH; CAV; CTX; CHB; CMH; DHI; DHOM; FRTG; HOV;
KBH; WLS; MDC; MHO; MTH; MODT; NHCH; NUR; OH; OHCA; OHCB; OHB;
PHHM; PHM; RYL; SKY; SEHI; SPF; TOL; WLT; WCI; WTMK; WLFO
SOME PRIOR COMMENTS: Looks like the Home Builder stock sector
could make a top if the Index stalls in the 397 area.
TODAY: Looks like a top due to the downside reversal today - a "bull
trap" top, with a move to a new high followed by a sharp downside
reversal and move to a new low relative to recent lows. Soon, there
may be no place to "hide" investment wise, except maybe in "small
cap" and in index puts.
UPDATE: 6/25
Leigh Stevens
Chief Market Strategist
lstevens@OptionInvestor.com
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The Option Investor Newsletter Tuesday 06-25-2002
Copyright 2001, All rights reserved. 2 of 3
Redistribution in any form strictly prohibited.
****************
PICKS WE DROPPED
****************
When we drop a pick it doesn't mean we are recommending a sell
on that play. Many dropped picks go on to be very profitable.
We drop a pick because something happened to change its
profile. News, price, direction, etc. We drop it because we
don't want anyone else starting a new play at that time.
We have hundreds of new readers with each issue who are
unfamiliar with the previous history for that pick and we
want them to look at any current pick as a valid play.
CALLS:
*****
MIK $40.21 -2.09 (-2.93) The weakness in the broader market
today as well as the selling in the retail sector pressured
MIK back down to the tune of nearly 5 percent. We don't
like the way the stock turned tail to today's selling, and
feel that it could reverse at any time. Make sure to have
tight stops on open positions, or look to exit into a bounce
during tomorrow's session.
ATH $66.36 -2.84 (-6.14) The positive impact of ATH's addition
into the Russell index at the end of the month was unable to buck
the larger trends of broad market weakness and continuing
investor concerns in the wake of last week's Supreme Court
ruling related to HMOs. Rather than continuing its upward climb,
ATH sold off sharply over the past 2 days. It looked like
yesterday's rebound off the lows might salvage the play and give
us a decent entry point, but that premise was proven false at the
open as the stock crashed back below our $69 stop. Clearly it is
past time that we drop coverage of ATH, so it is a drop tonight.
KFT $40.62 -0.70 (-1.31) Remember that ascending channel that has
been propelling KFT gradually higher for the past 5 months. Well,
it was stretched to the breaking point yesterday and shattered
today, as the stock fell sharply throughout the day, ending at
the low of the day. The slight positive bias created by the stock
being added to the Russell index was totally swamped by the wave
of selling that hit virtually every sector of the market on
Tuesday. We considered keeping the play open in hopes of a
bounce tomorrow, but with the broken channel and the lack of a
positive catalyst, we're opting to drop the play tonight. Use
any sort of rebound tomorrow to close open positions at a more
favorable price.
PUTS:
*****
TBH $21.55 -1.40 (+0.95) TBH staged a massive engulfing
reversal in yesterday's session which may have brought an
end to the stock's long standing downward trend over the
short term. Look to exit open positions into any further
pullback in tomorrow's session, or set a tight stop just
above today's intraday high at the $23.26 level.
ENZN $23.20 -0.59 (-0.14) Despite another round of vicious
selling in the Technology sector that knocked the Biotech index
(BTK.X) back for a 3% loss, plucky ENZN just refused to break
down below the $23 support level. While the play is still going
our direction, there just doesn't appear to be enough reward in
the play to justify taking the risk of a possible short-covering
rally. We're dropping ENZN tonight, so use any weakness tomorrow
to close open positions.
***********************************************************
DAILY RESULTS
***********************************************************
Please view this in COURIER 10 font for alignment
*************************************************
CALLS Mon Tue
DUK 31.70 -0.10 0.04 Doing very well in this market!!!
KFT 40.62 -0.61 -0.70 Dropped, broke down below LT trend
ATH 66.36 -3.30 -2.84 Dropped, trouble in HMO land today
MIK 40.21 -0.85 -2.09 Dropped, retail taking it on chin
DHI 25.16 0.26 -1.84 Housing holding its own ground
QCOM 26.36 0.68 -0.44 New, guided sales and EPS higher
BA 42.87 0.23 0.13 New, Dow component trading strongly
PUTS
MIL 30.53 0.49 -1.06 Broke down from short term relief
ENZN 23.20 0.45 -0.59 Dropped, curiously strong at $23
IBM 68.60 0.95 -1.10 Has to warn any given day now???
ZLC 37.66 0.10 -0.84 Looking for confirmation at $37
TDS 61.25 1.25 -2.00 Holding analyst meeting tomorrow
NVLS 31.75 1.21 -1.69 Nice try Merrill, another failure
EMMS 19.23 -0.03 -3.27 A thing of beauty, book gains now?
TBH 21.55 1.35 -1.40 Dropped, engulfing reversal Monday
KMI 40.00 0.00 -0.20 Biding its time above the $40 mark
EXPE 61.64 -2.87 -3.16 New, trouble brewing over offer
JCI 78.41 -0.72 -3.17 New, hitting the skids in autos
LXK 52.05 0.31 -3.33 New, debt rating down the drain
MXIM 35.92 1.64 -2.35 New, expensive chip getting cheap
QLGC 37.45 -1.19 -3.91 New, storage sector coming undone
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********************
PLAY UPDATES - CALLS
********************
DHI $25.16 -1.84 (-1.58) In typical "sell the news fashion",
Housing stocks saw a fair amount of selling pressure on Tuesday,
following the release of the May Existing Home Sales this
morning. Despite the better than expected report, the Dow Jones
US Home Construction sector ($DJUSHB) got caught in the downdraft
in the broad markets on Tuesday. DHI gave up nearly 7%, as it
fell back to its 10-dma ($25.13) at the close on robust volume.
With strong support in the $24.50-25.00 area, this looks like it
could be a great entry point. The problem is that big red candle
on the daily chart. It doesn't look healthy, and we need to be
very careful about buying the dip, now that the daily Stochastics
have rolled over from overbought territory. Look for a rebound
from support to provide new entries but only if it comes with
strong volume. Otherwise, wait for the bulls to prove their case
by pushing DHI at least through the $26.25 intraday resistance
level before playing. Keep stops set at $24.
DUK $31.70 +0.04 (-0.06) Stagnation is turning into relative
strength, as DUK has held up nicely while the broad market once
again fell apart on Tuesday. The stock is still wedged up
against its descending trendline at $32 and looks like it could
break out above it with just the slightest positive catalyst.
But with the late breaking news about fraud at WCOM hitting the
after-hours market hard, it isn't likely to happen at the open
tomorrow. Where the WCOM story is pertinent is in the comparisons
that are already being made, stating that "WCOM is another Enron".
How many times have we heard that Enron was an isolated case, and
could never happen again? The WCOM story is not going to sit well
with investors in DUK in the morning. Look for another dip to
provide entry into the play, but only pull the trigger if buying
volume is strong on the rebound. The better strategy may be to
wait for the bounce to carry DUK through its descending trendline
before playing. Keep stops set at $29.
**************
NEW CALL PLAYS
**************
QCOM - QUALCOMM $26.36 -0.44 (+0.24 this week)
QUALCOMM, Inc. is a developer and supplier of code division
multiple access (CDMA)-based integrated circuits and system
software for wireless voice and data communications and global
positioning system (GPS) products. The Company offers complete
system solutions, including software and integrated circuits
for wireless handsets and infrastructure equipment. This
complete system solution approach provides customers with
advanced wireless technology, enhanced component integration
and interoperability, as well as reduced time to market.
QUALCOMM provides integrated circuits and system software to
many wireless handset and infrastructure manufacturers.
Through the gloom and doom of the telecom sector, there's been
one stock to hold up relatively well. And the company expects
a strong third-quarter, how do you like that for guidance? QCOM
said late last week that it expected to meet or beat the high
end of its previous financial guidance during its fiscal third
quarter due to increasing demand for its wireless technology.
The company had previously said that it expected earnings per
share of 21 cents to 23 cents. The analyst community had an
average expectation for earnings of 22 cents per share, in
between the company's guidance. In addition to its higher than
expected earnings guidance, QCOM offered up higher than expected
unit shipments of phone chips. Yet despite the positive outlook
offered by the company, all the negativity surrounding the
Nasdaq and broader technology sectors drowned out QCOM's lone
sign of strength. But we think that th first sign of stable
price action should lead the buyers back into QCOM who seek
technology exposure in this market environment. Moreover,
the stock could see a run into the earnings announcement as
traders bet ahead on just how positive the good news could be
for which QCOM offered a hint last Friday. Traders looking to
take new plays can look for bounces near support at the $25
level which is close to current levels. A stop just below at
the $24 level should help to manage the play. If you're more
comfortable with trading a breakout, then wait for the stock
to clear its short term congestion with a rally above the $28
level on heavier intraday volume. Confirm direction in the
broader tech sector before entering on a breakout.
BUY CALL JUL-25*AAW-GE OI= 2737 at $3.10 SL=1.50
BUY CALL JUL-30 AAW-GF OI=10314 at $1.00 SL=0.50
BUY CALL AUG-25 AAW-HE OI= 70 at $4.00 SL=2.00
BUY CALL AUG-30 AAW-HF OI= 1126 at $1.75 SL=0.75
Average Daily Volume = 15.2 mln
BA – Boeing $42.87 +0.13 (-0.10 this week)
One of the world's major aerospace firms, BA operates in three
principal segments: commercial airplanes, military aircraft and
missiles, and space and communications. Commercial airplanes
operations involves the development, production and marketing
of commercial jet aircraft, principally to the commercial
airline industry. The Military Aircraft and Missiles division
is involved in the research, development, production,
modification and support of military aircraft, including
transport and attack aircraft. The Space and Communications
segment is involved in the research, development, production,
modification and support of space systems, rocket engines and
battle management systems.
It has been hard finding a DOW component with a favorable risk
reward ratio to the long side for awhile now, as most have been
trending downward with the DOW since the middle of May. But
with selling in the DOW 30 picking up steam on Tuesday, we've
found a pocket of strength. Shares of BA have been trading
sideways for the past few weeks, and even in the climactic
selling days, the bears have been unable to break the $41.50
support level. Note that the38% retracement of the rally off
the September lows is $41.88, so it should come as no surprise
that buyers continue to show up near that level. As a measure
of the stock's relative strength, it is interesting to observe
that this broad market pullback has only driven BA down to the
38% level, rather than 50% or 62%. Perhaps the reason for this
relative strength lies in the series of recent contract wins for
the company, or perhaps it is due to word that the company is
getting set to ramp up production in the near future. Any broad
market rebound ought to take BA along for the ride, and it looks
like the initial upward surge could take the stock up near the
first serious resistance near $45-46. Whatever the case, the
technicals don't lie. It is a foregone conclusion that the broad
markets will open in negative territory tomorrow in the wake of
the news of massive fraud at WCOM, and we want to use the rebound
off that dip to establish a favorable entry into the play. Look
for a rebound from the $41.50-42.00 to provide that entry, but
don't try to catch a falling knife. Wait for the bounce. We are
seeing a tight stop at $41.25, as a drop below that level would
force us to assess more risk in the trade than we are comfortable
with tonight.
BUY CALL JUL-40 BA-GH OI= 331 at $3.70 SL=2.25
BUY CALL JUL-42*BA-GV OI= 769 at $1.90 SL=1.00
BUY CALL JUL-45 BA-GI OI=2480 at $0.85 SL=0.25
BUY CALL AUG-42 BA-HV OI=2101 at $2.65 SL=1.25
BUY CALL AUG-45 BA-HI OI=3142 at $1.50 SL=0.75
Average Daily Volume = 3.29 mln
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*******************
PLAY UPDATES - PUTS
*******************
MIL $30.53 -1.06 (-0.51) The last three days have been a short
term consolidation in MIL following its very big and enjoyable
decline late last week during Thursday's session. The stock
showed the first signs of breaking down again below its short
term consolidation during today's session with the decline
below the $31 level on continued active trading volume.
Today's volume total again eclipsed the 30-day average trading
volume levels by about 100 K shares. The stock looks suspect
to further downside from here, but whether or not it continues
lower depends on the action in the broader market as well as
the Biotechnology Sector Index (BTK.X). Traders looking for
momentum based entries into weakness below current levels
should watch price action in the biotech group for confirmation
before pulling the trigger. The stock should continue lower
so long as the BTK.X does the same. Look for a bounce from the
$30 level in tomorrow's session for new put entries. Or
another failed rollover from the 10-dma on any intraday short
covering rally.
ZLC $37.66 -0.84 (-0.74) There was a shift in management at the
top of ZLC Monday morning. The company reported that it had
selected Mary Forte for the chief executive spot while Robert
DiNicola, who will retire at the end of July, will move into
the chairman spot. Whether or not the news had anything to do
with the stock's rebound yesterday is difficult to say. We tend
to think that the 200-dma had more to do with the stock's rebound
than the news, but that's just our opinion. ZLC traded down to
its 200-dma, actually slightly below, for the first time since
last fall during yesterday's session. We expected a slight bounce
from that level on the first test, which is exactly what we got
yesterday. Today the stock bled lower down to that level where it
closed. The breakdown that we had been looking for could come in
the next day or two, so be on your toes in the coming sessions.
Watch for a decline below the $37 level which would confirm the
break below the 200-dma. And make sure that volume confirms the
breakdown.
TDS $61.25 -2.00 (-0.75) It has been a volatile two session for
TDS so far this week, with its back and forth price action. The
most important development so far this week was the breakdown
during yesterday's session to a new relative low in the stocks
three month downward trend. The stock traded down to just above
the $60 level on a spike in volume, but from there it rebounded
into the close of the session. But today's reversal put the
stock right back down, which was another example of why we
favor entering new put plays on this stock during a short
covering rally, which is the game plan going forward. Breakdown
traders can try a new put play on a move below the $60 level in
a declining market. The company is scheduled to present at the
William Blair & Company annual growth stock conference tomorrow
afternoon at 2:40 p.m. EST. Traders with open positions or those
looking to enter new put plays might keep that time on the clock
tomorrow because depending on TDS' guidance during the meeting,
the stock could be in play.
EMMS $19.23 -3.27 (-3.30) What a most wonderful surprise. EMMS
reported earnings that were a little on the light side. The
company posted a wider than expected net loss of $168 million
compared with a loss of $16 million in the year ago period.
Revenues fell as well during the most recent quarter. But to
make matters even worse, the company guided down expectations
for the quarter ahead as the company has not yet regained any
visibility. The stock responded accordingly treating put
players to a nice 14 percent plunge on the day, which amounted
to more than $3 in the stock itself. And what an entry that
was offered up during yesterday's session on the retest and
subsequent rollover from the 200-dma! We hope that you caught
that entry! Now, start looking for exit points. We'll take
gains off the table on further weakness below today's intraday
low at the $18.50 level, possibly down around the $18 mark.
The other option is to set a relative tight stop above current
levels to protect profits. There are two choices for new stop
points either at $20 or $20.50 depending upon how much upside
you're willing to give back.
NVLS $31.75 -1.69 (-0.48) NVLS never quite reached its downward
sloping 10-dma during the early morning pop in the stock. We
were hoping that it would so that we could take another good
entry point into new put plays on another rollover from that
level. The news that sparked the rally in the morning was
Merrill Lynch's opinion that the company was on track to meet
its $275 million order goal during the second quarter. Merrill
said that the concerns about the convertible debt were over
blown and reiterated its strong buy rating on the "attractive"
valuation of the shares. Sure, Merrill. The fact that the
stock couldn't get moving higher on such bullish comments
should tell us something. We like the way the stock failed to
rally very much, although we would have liked just a little
more upside to the 10-dma. Nevertheless, the stock's weak
price action in light of the Merrill noise bodes very well
for this play going forward. Look to take new entries on a
break below today's intraday low at the $31.32 level.
KMI $40.00 -0.20 (-0.20) It's been a quiet two days for the
broader natural gas sector (XNG.X) and accordingly for KMI.
The XNG.X has been bouncing above its short term support
level at the 160 mark in the last three sessions. The index
only finished fractionally lower today on the further
weakness in the broader stock market. KMI has followed the
price action of the XNG very closely in the last two days
as the stock has found some short term support at the $40
level from which it keeps trying to bounce. But it's only
a matter of time before the sellers return to the natural
gas index and KMI. Look for a solid breakdown to pressure
KMI below the $40 level in the coming days. The key will
be the volume. Look for heavy declining volume to return
to the stock on the way below $40.
IBM $68.60 -1.10 (-0.15) Did you grab a piece of that entry
point? Monday's rally came out of nowhere and had all the
earmarks of another solid entry point into our IBM play. Sure
enough, the bulls ran out of steam right at the $71.50 level
today, which just happens to be the top of the gap down from
last Friday. While IBM didn't close at its lowest level for
this cycle, it did set a new 3-year closing low of $68.60. The
PnF chart is still lighting the way to further downside with a
price objective of $60. Based on the sharp drop in the futures
tonight, it is highly likely that IBM will break support near
the $67 level tomorrow. Use either a volume-backed breakdown
under the $67 level or a failed rally below $71.50 to initiate
new positions. As the stock continues to fall, we will continue
to tighten our stop to prevent giving our gains back to Mr.
Market. Lower stops to $72.50.
*************
NEW PUT PLAYS
*************
JCI - Johnson Controls $78.41 -3.17 (-3.89 this week)
Johnson Controls, Inc. is engaged in automotive systems and
facility management and control. In the automotive market, the
Company is a major supplier of seating and interior systems,
and batteries. For non-residential facilities, Johnson Controls
provides building control systems and services, energy
management and integrated facility management. Johnson Controls
conducts business in two operating segments: Controls Group and
Automotive Systems Group. The Controls Group is a worldwide
supplier of control systems, services and integrated facility
management to the non-residential buildings market.
The auto sector was the all the rage not too long ago. The
major manufacturers were ramping higher, and so were the
auto parts stocks. The momentum behind the moves in many of
the autos stocks was fueled in part by the zero percent
financing offered in the wake of the events of September 11.
The zero percent financing lifted sales across the spectrum
of auto companies, which revived the belief that the U.S.
consumer would carry the economy through this funk. But
the reality is coming home to roost for many of the auto
makers and parts manufacturers. It seems that sales are
slowing, and the market is expecting further declines as
the positive impact of last fall's zero percent financing
runs out. The bellwether of the broader group in General
Motors (NYSE:GM) has been on a steep slide since peaking in
early May up above the $68 level. The trends are everywhere
in the auto sector. One stock that sticks out after today's
breakdown is JCI. The stock had been bouncing along its
200-dma for the last three weeks, but that was changed
during today's volume backed breakdown below that level.
The momentum has clearly shifted to the downside for this
stock as well as others in its sector. The high price of
JCI offers some of the best downside potential in the group,
so that's why we're choosing this stock over others. Watch
for continued heavy selling early in tomorrow's session.
If the market is negative, watch for a breakdown below
today's low on heavy intraday volume. A retest of the 200-dma
now overhead at the $81.25 level is certainly not out of the
question, so don't be afraid to pull the trigger on new put
plays if the stock stages a one or two day rebound back up
to the 200-dma, then promptly rolls over. Our stop is just
above the 200-dma at the $82.00 level.
BUY PUT JUL-80*JCI-SP OI= 121 at $3.60 SL=2.00
BUY PUT JUL-75 JCI-SO OI= 281 at $1.50 SL=0.75
Average Daily Volume = 434 K
EXPE - Expedia $61.64 -3.16 (-5.99 this week)
Expedia, Inc. is a provider of travel-planning services. The
Company's global travel marketplace includes direct-to-consumer
Websites offering travel-planning services located at
Expedia.com, Expedia.co.uk, Expedia.de, Expedia.ca, Expedia.nl
and Expedia.it. The Company also provides travel-planning
services through Voyages-sncf.com, as part of a joint venture
with the state-owned railway group in France. In addition, the
Company provides travel-planning services through its telephone
call centers and through private label travel Websites through
its WWTE business. WWTE is a division of Travelscape, Inc.,
one of the Company's wholly owned subsidiaries. In February
2002, a controlling stake in the Company was acquired by USA
Networks, Inc.
There's trouble brewing over a recent buyout offer. And it's
only adding on to the weakness already in place in this stock.
Hotels.com reported this morning that it had formed a committee
to review the buyout offer made by USA Interactive. The
committee hired Lazard as its investment banker to review the
bid proposed by USA (NASDAQ:USAI) which owns about 65 percent
of Hotels.com and the majority stake of Expedia and Ticket
Master (NASDAQ:TMCS). The combined $4.5 billion buyout offer
on the table by USA is what's under scrutiny. It's too early
to draw any conclusions from what the review is all about,
but judging by the way the market reacted to the news during
today's session, investors didn't like what they heard. ROOM
lost 3.84 percent on the day, TMCS shed 4.22 percent, and
EXPE dropped the most by 4.87 percent. The relative weakness
in EXPE caught our eye. The stock is coming out of another
breakdown from a short term consolidation in its descending
trend which has seen the lofty shares fall from above the $80
mark to current levels. We expect the downside momentum to
continue with the negative market environment, and the growing
pessimism over the strength of the U.S. consumer. Watch for
a breakdown below the $60 level which could eventually lead
to a test of the 200-dma all the way down at the $51 level.
Traders who prefer a rollover entry put play can wait for
EXPE to come back up into short term congestion up near the
$65 level. Our stop is initially in place at the $67.75
level, just above the downward sloping 10-dma. The 10-dma
should move lower in the next two days, so we'll look to
slide the stop down accordingly.
BUY PUT JUL-65*UED-SM OI=1381 at $5.90 SL=3.25
BUY PUT JUL-60 UED-SL OI=1960 at $3.45 SL=1.75
Average Daily Volume = 1.92 mln
LXK – Lexmark International $52.05 -3.33 (-3.02 this week)
Wrapping its arms around the entire life-cycle of printers, LXK
develops and manufactures a broad range of laser, inkjet and dot
matrix printers for the office and home markets. The company is
also the exclusive source for new print cartridges for the laser
and inkjet printers it manufactures. Additionally, LXK provides
supplies for IBM printers and offers after-market laser
cartridges for the large installed base of a range of laser
printers sold by other manufacturers.
Hewlett-Packard tried to wow the market this morning with a new
printer line up, positioned to focus on photo printing. We've
pretty much lost interest in that stock from a trading standpoint,
but it sets in motion an interesting series of events. With
demand limited for new printers, and a lack of a PC upgrade
cycle, we could be setting up for a printer price war this
summer. Price wars seem to benefit the consumer, but not
necessarily any of the players in a fixed-demand marketplace.
Shares of LXK have already been under a fair amount of selling
pressure over the past 2 weeks, but that pressure moved up a
notch this morning, with the stock shedding 6% on volume well
over double the ADV. Adding to the technical problems, LXK
closed below its 200-dma ($53.97) for the first time since the
end of February. There is solid support near $52, but when that
gives way, the stock looks vulnerable to $49 and then $45. The
PnF chart paints an even more bearish picture with a price
objective of $40. The $56 level is now an area of formidable
resistance and a failed rally near this level would definitely
make for a solid entry point. Then all we have to do is set our
stop at $56.75 (just above last week's intraday highs).
Alternatively, look to initiate new positions on a breakdown
below the $51.50 level on continued heavy selling volume.
BUY PUT JUL-55 LXK-SK OI=2242 at $4.90 SL=3.00
BUY PUT JUL-50*LXK-SJ OI=1327 at $2.25 SL=1.00
Average Daily Volume = 1.23 mln
MXIM – Maxim Integrated Products $35.92 -2.35 (-0.75 this week)
MXIM designs, develops, manufactures and markets a broad range
of linear and mixed-signal integrated circuits, commonly
referred to as analog circuits. The company also provides a
range of high-frequency design processes and capabilities that
can be used in custom design. MXIM's objective is to develop
and market both proprietary and industry-standard analog
integrated circuits that meet the increasingly stringent
quality standards demanded by customers.
Ignoring the brief oversold rebound off of Monday's intraday
lows was the proper course of action, as the Semiconductor sector
(SOX.X) got beaten up to the tune of a 4.75% loss on Tuesday.
That wiped out Monday's aberrant gain, and the SOX is now only 33
points above its September intraday lows. As with many other
areas of the market, it now appears that the SOX will test those
lows and soon. When looking for pockets of weakness in the
Semiconductor arena, the biggest challenge now is to find stocks
that look like they still offer significant gains on the down
side. MXIM is one of those stocks, as its PnF chart is pointing
to a price objective of $29. Like the SOX, MXIM is
fast-approaching its September lows near $32.50, and it is a
safe bet that there will be at least a rally attempt from that
area. On the upper end, MXIM has suffered some serious technical
damage with the breakdown under the $41 support level. Then the
past 3 days, the intraday highs have converged below the $40
level, defining another level of overhead resistance. Look for
an intraday rally to provide the best entry points into the play,
ideally with a failed rally in the $39-40 area. If trading the
breakdown under the $35.75 level (Tuesday's intraday lows), keep
a sharp eye out for an oversold bounce in the overall chip sector
and set stops according to your risk tolerance. We are initiating
coverage with our stop set at $40.50.
BUY PUT JUL-35*XIQ-SG OI=1011 at $2.60 SL=1.25
BUY PUT JUL-30 XIQ-SF OI= 207 at $1.00 SL=0.50
Average Daily Volume = 6.62 mln
QLGC – QLogic Corporation $37.45 -3.91 (-5.04 this week)
Somebody has to make the equipment that lets your computer talk
to all its peripheral equipment, and QLGC does it well. A
leading designer and supplier of semiconductor and board-level
input/output (I/O) management products, QLGC has been providing
SCSI-based connectivity solutions to this market sector for over
12 years. QLGC's I/O products provide a high performance
interface between computer systems and their attached data
storage peripherals, such as hard disk and tape drives,
removable disk drives and RAID (redundant array of independent
disks) subsystems. The company is also the market share leader
in Fibre Channel host bus adapters, a market segment that is
receiving tremendous attention from investors.
Remember the good old days, when Storage stocks like EMLX, BRCD
and QLGC traded with lofty valuations and staged impressive
intraday moves of $5-10? Like much of the Technology sector,
Storage stocks have been reduced greatly both in terms of
valuation and intraday range. But wait, just today QLGC got
whacked for a 9.47% loss as it lost nearly $4 to close at its
lowest level since late February. Tuesday's slide hammered the
stock below support near $41 and it should come as no surprise
that QLGC gravitated to the $37 level, as this is the site of the
50% retracement of the stock's fall rally. QLGC has rebounded
strongly from this level twice in the recent past (late February
and early May), but we're betting that this time it is going to
be different. Perhaps it has to do with the fact that the
double-bottom breakdown on the PnF chart is pointing to a price
target of $29. Following the fraud allegations surrounding
WCOM's accounting practices tonight, it seems likely that the
NASDAQ will open significantly below its current level tomorrow
morning and that will probably pressure QLGC lower as well. But
with the market nearing oversold again, shorting in the hole
isn't the best strategy. Rather, we'd prefer to enter on the
first failed rally, ideally in the vicinity of the $40 resistance
level. Eager bulls can target a breakdown under the $37 level,
but need to keep the play on a short leash due to the risk of a
sharp oversold rebound. A stronger rebound could even give us an
entry in the $41-42 area, but we don't want to entertain thoughts
of a bearish play if QLGC tops the $42 level. Therefore, we are
setting our stop initially at 42.50
BUY PUT JUL-40*QLC-SH OI=5175 at $4.90 SL=3.00
BUY PUT JUL-35 QLC-SG OI=2532 at $2.50 SL=1.25
Average Daily Volume = 10.0 mln
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The Option Investor Newsletter Tuesday 06-25-2002
Copyright 2001, All rights reserved. 3 of 3
Redistribution in any form strictly prohibited.
*********************
PLAY OF THE DAY - PUT
*********************
NVLS - Novellus Systems $31.75 -1.69 (-0.48 this week)
Novellus Systems, Inc. (Novellus) manufactures, markets and
services semiconductor processing equipment. The Company's
products are comprised primarily of advanced systems used to
deposit thin conductive and insulating films on semiconductor
devices, as well as equipment for preparing the device surface
prior to these deposition processes. Novellus is a supplier of
high productivity deposition and surface preparation systems
used in the fabrication of integrated circuits. Chemical Vapor
Deposition systems employ a chemical plasma to deposit all of
the dielectric (insulating) layers and certain of the metal
(conductive) layers on the surface of a semiconductor wafer.
Physical Vapor Deposition systems are used to deposit
conductive metal layers by sputtering metallic atoms from the
surface of a target source via high DC power.
Most Recent Update
NVLS never quite reached its downward sloping 10-dma during the
early morning pop in the stock. We were hoping that it would so
that we could take another good entry point into new put plays
on another rollover from that level. The news that sparked the
rally in the morning was Merrill Lynch's opinion that the
company was on track to meet its $275 million order goal during
the second quarter. Merrill said that the concerns about the
convertible debt were over blown and reiterated its strong buy
rating on the "attractive" valuation of the shares. Sure,
Merrill. The fact that the stock couldn't get moving higher on
such bullish comments should tell us something. We like the
way the stock failed to rally very much, although we would have
liked just a little more upside to the 10-dma. Nevertheless,
the stock's weak price action in light of the Merrill noise
bodes very well for this play going forward. Look to take new
entries on a break below today's intraday low at the $31.32
level.
Comments
NVLS failed to rally on one of the most bullish analyst comments
in recent history. The stock's inherent weakness should
continue over the very short term as it appears that the sellers
are far from finished. Look for a breakdown below today's
intraday low in tomorrow's session. If the WCOM news is
received poorly, watch for a retest of September's lows as an
exit point.
BUY PUT JUL-35 NLQ-SG OI=5948 at $4.70 SL=2.75
BUY PUT JUL-30*NLQ-SF OI=1995 at $2.00 SL=1.00
Average Daily Volume = 8.70 mln
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************
MARKET WATCH
************
A few very impressive plays were triggered in the last two days.
Look for these two next possible trades to deliver.
To Read The Rest of The OptionInvestor.com Market Watch Click Here
http://members.OptionInvestor.com/watchlist/062502.asp
**************
MARKET POSTURE
**************
Will WCOM break this market? Key levels sit just below today’s
closing prices in the major market averages.
To Read The Rest of The OptionInvestor.com Market Posture Click Here
http://www.OptionInvestor.com/marketposture/062502.asp
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**********
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